On October 25, 2024, the Small Business Administration (SBA) published a proposed rule to implement recommendations from the Office of Federal Procurement Policy’s memorandum “Increasing Small Business Participation on Multiple-Award Contracts” from earlier this year. The SBA hopes to increase small business participation on multiple award contracts (MAC) through the application of the Rule of Two to MAC task and delivery orders. However, by declining to follow the Court of Federal Claims’ (COFC) decision in Tolliver Group, the SBA created a process for procuring agencies to circumvent the Rule of Two and indeed produced the exact opposite results.
The Rule of Two
The Rule of Two refers to the requirement that agencies set aside acquisitions for small business concerns whenever there is a reasonable expectation that offers will be obtained from at least two responsible small business concerns that are competitive in terms of fair market prices, quality, and delivery. Currently, the Rule of Two applies to the issuance of a MAC, but application at the task and delivery order level brought confusion to both government and industry partners.
The Proposed Rule – When To Apply
The SBA provides three particular reasons for the proposed rule:
- The Small Business Act supports the interpretation that the Rule of Two should apply to the award of a contract and all purchases of goods and services.
- The application of the Rule of Two to orders advances equity by creating more contracting opportunities for small businesses.
- The SBA sought to clarify a disagreement between the COFC and the Government Accountability Office (GAO) regarding how to apply the Rule of Two to task and delivery orders.
In Tolliver Group, COFC held that “an agency must apply the Rule of Two before an agency can even identify the possible universe of procurement vehicles which may be utilized for a particular scope of work.”[1] However, in a protest after COFC’s ruling, GAO reiterated its longstanding interpretation that Congress intended to clearly delineate a distinction between a procuring agency’s mandatory set-aside obligations when establishing a contract and an agency’s discretion with respect to setting aside task or delivery orders under a MAC, i.e., indefinite delivery indefinite quantity contracts.[2]
While SBA’s intent is to advance equity, it misses the mark by declining to follow the COFC’s Tolliver Group decision. The proposed rule states that procuring agencies will not need to apply the Rule of Two prior to choosing a particular MAC vehicle, though agencies will be required to conduct the Rule of Two analysis on the selected MAC before issuing the order. Nonetheless, this non-Tolliver rule will allow agencies to develop requests for proposals specifically to avoid this rule. Agencies will create distinct small and large contracting vehicles such that when application of the Rule of Two is required at the ordering level—it is useless. This version of the Rule of Two’s application leaves small businesses with no recourse and could take away billions of dollars of revenue from small businesses.
The Proposed Rule – Exceptions and Notifications
There would be three exceptions to the Rule of Two. The proposed rule would not apply to orders:
- under Federal Supply Schedule Contract as they are continually open to new entrants and highly accessible to small businesses;
- when an exception to fair opportunity applies; or
- where agency procedure reflects an appropriate exception.
Appropriate agency-specific exceptions may include exceptions to address supply chain and national security risks or to address goods or services that no small businesses provide. However, any agency-specific exception must be developed with the agency’s small business specialists and the SBA and must be made public before they are used. Further, when any of the exceptions apply, the agency must document its determination and coordinate with the small business specialist.
For MACs that exceed the substantial bundling threshold—and where the expected number of small business awardees is projected to be less than 30% of the total number of awardees—the notice requirement for when an agency decides to establish a MAC without an order set-aside provision is increased from 30 days before the solicitation is issued to as early as possible in the acquisition planning process. The contracting officer must notify the SBA’s procurement center representative and include market research and documentation explaining why the MAC is not set aside or reserved with an expectation of at least 30% for small businesses.
Agencies will be required to share with their small business specialist the basis for (1) not setting aside orders over the micro-purchase threshold (unless an exception applies) and (2) the decision to place an order under a MAC with only one or no small business contract holders. Agencies will also be required to maintain documentation of such decisions.
The SBA estimates the proposed rule could add up to $6 Billion per year in small business contracting spending, but this fails to take into account the likelihood that agencies will circumvent the rule’s application in the first place. Contractors currently holding task and delivery orders will not be affected by the proposed rule, though any new orders placed under existing MACs will require the Rule of Two’s application.
If your firm is affected by these proposed changes and would like to submit public comments to SBA, please make sure to do so before the deadline on December 24, 2024.
If you have questions about SBA’s proposed changes, please contact Cy Alba, Meghan Leemon, or another member of PilieroMazza’s Government Contracts Group. Special thanks to Krissy Cralle for her assistance with this client alert.
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[1] 151 Fed. Cl. at 104.
[2] Itility, LLC, B-419167, Dec. 23, 2020, 2020 CPDP412 at 18.
